This article first appeared in City & Country, The Edge Malaysia Weekly on November 30, 2020 - December 6, 2020

Industrial properties, especially warehouses, have become one of the most sought-after types of real estate due to the rise of e-commerce. It is even more so now amid the Covid-19 pandemic.

Of the many subsectors in the industrial sector, one asset class has been slowly growing and gaining attention — cold storage warehouses. But what are these and why are they becoming popular?

A cold storage warehouse is a type of warehouse that comes with temperature control, says JLL Property Services (M) Sdn Bhd country head YY Lau. “This feature allows the storage of items that need to be in a specific environment and temperature. Thus, it is typically used by such sectors as food and beverage (F&B), medical and pharmaceutical. Some items in the electrical and electronics (E&E) sector, such as semiconductors, also need this kind of environment.”

According to AREA Management Sdn Bhd executive chairman and Alpha REIT Managers Sdn Bhd chairman Datuk Stewart LaBrooy, different sectors require different levels of temperature. For instance, pharmaceuticals need an air-conditioned environment of 16°C to 24°C. Chilled meats, dairy products and vegetables require 0°C to -5°C while frozen foods are kept at -18°C to -28°C.

Cold storage warehouses have been popular because there will always be food and other items that need to be kept in a temperature-controlled environment while they are being transported from one point to another, says Siva Shanker, CEO of real estate agency at Rahim & Co International Sdn Bhd.

Their proximity to population centres and population growth as well as changing consumer preferences and consumer spending is the primary driver of cold storage warehouses, says LaBrooy. Another driver of this segment is the growing demand for perishable goods, he adds.

“Consumers are now more aware of health and wellness as well as the effect of food nutrients, especially protein, on their overall physical and mental growth and development. As such, it has resulted in a change in the consumption pattern of perishable foods such as dairy products, fruits, vegetables and high-protein animal-based products,” says LaBrooy.

Lau concurs, saying that the F&B, medical, pharmaceutical and electrical and electronics sectors have been growing in recent years and are projected to continue doing so, especially after the pandemic. “This translates into higher demand for cold storage warehouses.”

According to Siva, there will always be demand for cold storage warehouses because their infrastructure cost is very high. “You need to build a cold room and not just a simple warehouse. It is basically a giant refrigerator inside a warehouse and it costs a lot of money to do it. For anything that costs a lot of money, the investment industry will hesitate.”

Lau and LaBrooy agree. “The cost varies by the specification of the warehouses, but it could potentially reach about three times the cost of a typical warehouse. To rationalise the comparatively high cost, investors can conduct a market study though industry experts or consultants to analyse the demand and recommend the right product or service to gain optimum return on investment,” says Lau.

Moreover, the annual operating cost for cold chain businesses is higher per cubic feet, LaBrooy points out. The energy expense alone could account for 30% of the total expenses. “As the cold chain industry is an energy-intensive one, the capital investment cost goes up for cold chain providers due to investments in back-up energy systems,” he says.

Another barrier to entry is the high cost of real estate, says LaBrooy. “Acquiring land and constructing a fully integrated, international-class cold storage facility with one million cubic feet of storage capacity requires a significant capital investment. As cooling units are not mobile, the location of the project is a key factor, and acquiring enough land to build a cold storage facility is not easy for small players.”

Although cold storage warehouses are in demand, it has not increased exponentially, Siva opines. “The demand for this service is quite stable and predictable as you know how much food or medicine will be needed.”

Therefore, this type of warehouse is rarely built on speculation, says LaBrooy, adding that the frozen food industry benefits from being inelastic as the demand for food and pharmaceutical products remain relatively the same regardless of the country’s economic condition. “During the 2008 recession, restaurant visits dropped dramatically while the demand for frozen food products increased. The steady demand through various economic cycles mitigates the potential risks to owning and operating cold storage facilities.”

According to LaBrooy, most companies that need refrigerated storage services would outsource these functions to industry operators to avoid the substantial costs associated with operating these facilities.

Thus, cold storage warehouses are typically leased as they are usually part of the whole supply chain of cold chain logistics, says Lau. “These industries will need other support services such as the specialised transport of cold storage products.”

She adds that industries that find it more sustainable to have their own cold chain warehouses include large-scale food producers like Nestlé and KFC or large hypermarket chains like Tesco and Aeon, which will not only build to their own specifications but also set up their own cold chain logistics arm.

Hence, LaBrooy sees the industry as being split evenly between those with their own cold chain warehouses and those who contract them out. “Due to the high cost and restrictive government food-grade storage regulations, there is virtually no speculative development market in the cold storage industry. Instead, developers will partner with cold storage operators to perform build-to-suit projects for them,” he says.

Siva concurs. “Most of the time, developers and investors will go towards building a normal warehouse and later on, put in the infrastructure to develop a cold room and rent it out to third-party logistics (3PL) players,” he says.

He adds that the benefit of investing in this sector is that the rental per sq ft is higher due to the high upfront capital. According to him, the average rental of a conventional warehouse is between RM1.60 and RM2.20 psf, whereas the rental of a cold storage warehouse could be twice that or more, depending on the infrastructure.

“There are two scenarios. The first would be a developer that builds a conventional warehouse and rents it out to cold room operators, who put in the infrastructure themselves. The rental between the developer and operator will remain at the normal price as the infrastructure cost is on the operator,” says Siva.

“Another scenario would be the developer building to suit the specifications of a certain industry that needs a cold room. Then, the rental would be higher, depending on the cost of the infrastructure that was incurred by the developer.”

LaBrooy agrees. “There is no real disadvantage [in investing in this sector] as the demand is inelastic. It is growing as consumers’ tastes change. This [type of] asset normally provides a higher return on investment than the traditional warehouse.”

Siva says cold storage warehouses in Malaysia can be found in any industrial area as they are not location-specific. He points out that there are a number of them in Shah Alam, Klang and Port Klang in Selangor and Pasir Gudang, Johor.

Data provided by LaBrooy shows that TASCO Yusen Gold Cold Sdn Bhd, a subsidiary of TASCO Bhd, is the biggest player in cold storage logistics after its acquisition of Gold Cold Transport Sdn Bhd in Shah Alam and Gold Cold Integrated Logistics Sdn Bhd (previously known as MILS Cold Chain Sdn Bhd). Currently, Gold Cold Integrated Logistics has about 330,000 sq ft of cold chain warehouses and land to expand, which is located adjacent to Westports in Port Klang.

Another player, IGLO Malaysia Sdn Bhd, has 185,000 sq ft of facilities in Northport, Port Klang. Other players include SK Cold Chain Solutions Sdn Bhd in Batu Caves and Integrated Cold Chain Logistics Sdn Bhd in Penang.

LaBrooy notes that there are no new constructs of cold storage warehouses at the moment.

The pandemic has created a positive impact on the cold chain industry, resulting in the demand for cold chain warehousing, says LaBrooy. “The increasing adoption rate of packaged F&B products is a promising take for the growth of the cold chain in the food industry.”

He notes that the supply chain of every industry has been impacted due to restricted trade during the pandemic and this has resulted in food manufacturers emphasising on food products and their storage to increase shelf life. “This is expected to propel the market for cold storage.”

Lau opines that the rising demand for cold storage warehouses is likely to be long term, as the underlying sectors boosting it can be deemed sustainable, especially F&B, medical and pharmaceuticals, as well as E&E. “However, the degree of upward trajectory may vary in the future due to the current uncertain market,” she says.

Siva expects demand to remain more or less the same and will grow at a slower rate, on a par with the growth of the population. The only game-changer would be the Covid-19 vaccines.

Recently, US-based pharmaceutical corporation Pfizer Inc revealed that its experimental vaccine was more than 90% effective based on initial trial results. However, the vaccine would need to be stored in an -80°C environment.

Siva says this could potentially blow up the demand for cold storage warehouses as there are no such cold rooms in Malaysia yet. “Not only will it be a game-changer for warehouses, the entire logistics chain will be impacted, as the vaccine needs to be transported in -80°C vehicles as well.”

He opines that developers and industry players should look into building this type of cold storage warehouse soon. “It could be an existing cold storage warehouse, but cordon off a section to put in additional infrastructure to make it suitable to store the vaccine.”

Although cold storage warehouses are in demand, property experts do not see them becoming an asset class in their own right. “As the capital and operating expenditure are comparatively high, cold storage warehouses may not become an asset class of their own. Cold chain logistics are in good demand, and not necessarily just cold storage warehouses,” says Lau.

“Additionally, industries needing cold chain logistics are considering setting up their own arm instead of buying or leasing old storage warehouses from investors or developers.”

LaBrooy says, “They have yet to achieve the kind of scale to be an asset class of its own. But an industrial real estate investment trust (REIT) would be an interesting addition to the portfolio.”

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